Moody's said it was considering downgrading the insurers due to concerns over the credit profile. The rating outlook is already negative with the bonds listed at a pristine triple-A, and a cut could bring the debt down to double- or even single-A, Moody's said. Such a rating would affect the company's chances of selling bond insurance. MBIA plunged 15.8% to trade at $5.63 and Ambac plummeted 17% to sell at $2.49.
Mortgage insurer Radian (RDN) also tumbled on the news, dropping 10.2% to $5.31.
The NYSE Financial Sector Index declined 32.19, or 0.5%, to 7,187.98. Overall, the index is down 2.3% for the week, losing 170.80 points so far.KeyCorp (KEY - Get Report) also took a hit from a ratings agency. Standard & Poor's downgraded the stock to negative from stable. S&P cited an adverse legal ruling associated with its leasing business. Shares in the Cleveland-based bank dropped 2.5% to $18.28. State Street (STT - Get Report) gave back 53 cents to sell at $70.83 after announcing it would sell 35.7 million shares in a bid to raise $2.8 billion. One analyst speculated that the bank plans to make an acquisition with the capital. Regional bank Frontier Financial (FTBK) dropped 2% when Washington Banking Co. said it was pulling out of an $850 million deal with the bank operator because of regulatory uncertainty. Frontier shares closed at $14.25. On the positive side, Lehman Brothers (LEH) crawled back from a three-day decline as it gained 2.6% to $31.40. The investment bank received an upgrade from a Merrill Lynch analyst based on valuation. The stock has been trading down amid market concerns about its liquidity position as the company keeps raising capital.